Kenya tax regime criticised by World Bank

December 5, 2008
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, NAIROBI, Kenya, Dec 4 – Kenya’s tax system has been ranked as the most cumbersome in the East African region, in a new report by the World Bank.

According to Paying Taxes 2009, the third report in an annual series published by the World Bank, the International Finance Corporation (IFC) and PricewaterhouseCoopers (PWC), Kenya’s ranking dropped from 154 out of 178 economies in the previous year to 158 out of 181 economies this year.

PWC Tax Director Nikhil Hira said on Thursday that the Doing Business 2009 Report measures the ease of paying taxes for mid-size domestic companies, analysing tax systems and tracking related reform efforts.

“This particular report has surveyed 181 countries around the world, and it has tried to rank the countries in terms of the ease of paying tax in the tax administration of that country, the number of taxes people have to pay, the total tax a company has to pay in a particular economy and how long it actually takes a company to comply with tax legislation,” Mr Hira explained.

He revealed that Kenya’s unfavourable rating was due to its archaic tax laws that are not a reflection of the changing world of business.

“Most of our tax laws are based on the old British law, which is not conversant with the new ways of doing business that have emerged over the period,” Mr Hira said.

In addition, he said, was a tax system riddled with multiple tax payments each month, slow tax refunds and a tax net that is not wide enough.

“A lot of countries have entered into significant reforms and have also reduced companies’ corporation tax making them more favourable investment destinations and lowering Kenya’s ranking within the survey,” Mr Hira observed.

He stated that most countries’ Corporation Tax was slated at 30 percent while noting that even one percent reduction in this tax contributes a huge improvement in a country’s index in the report. 

“For instance a reduction of one percent in Russia’s corporation tax resulted in a 14 percent increase in revenue collection, and indeed in Kenya in the 90s when they did the same, tax collection went up. This is a phenomenon that has been observed worldwide,” he stated.

The report is recommending the centralisation of all levy collections in the country, a review of the Income Tax laws and reduction of Corporation Tax so as the country can improve its rankings.

According to the report the most popular reforms globally were reducing corporate Income Tax rates (in 21 economies) and improving electronic filing and payments systems efficiency.
 
On average, corporate Income Tax accounts for only 13 percent of tax payments, 26 percent of compliance time, and 37 percent of the total tax rate (tax cost to the case study company).
 
Speaking at the same forum, a Tax Partner at PWC Rajesh Shah, said:  “The task of developing conducive investment environments is expected to become even more challenging in these difficult times of global financial turmoil and economic slowdown with increasing pressures on tax authorities to raise revenues needed to finance public spending priorities in infrastructure, education, health, energy and other areas which are also important for economic growth and social integration.”

Mr Shah said that corporate Income Tax reform has had a positive impact for government and business in a number of economies and these benefits could be multiplied if tax reform is looked at in its entirety.

He added that tax reform should include all business taxes – not just corporate income tax. It should include all administrative aspects and the relationships between government and business generally.

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